InternationalVOLUME 15 ISSUE # 18

IMF and G20 to the rescue

To cope with the economic crisis resulting from the coronavirus, various international financial institutions have come up with aid packages for most affected developing countries. For example, the International Monetary Fund (IMF) has approved an emergency loan of $1.4 billion for Pakistan. Islamabad is also expected to get around $1.5 billion relief in the shape of delay in the repayment of loans to bilateral creditors.

However, Pakistan is not among the nations whose debts will be written off by rich nations and multilateral institutions. But it has been offered cheap financing by multilateral creditors and debt rollover by bilateral creditors. A statement issued by the IMF said: “The IMF Executive Board approved a purchase of Pakistan under the Rapid Financing Instrument (RFI) equivalent to $1.386 billion (50 per cent of quota) to meet the urgent balance of payment needs stemming from the outbreak of the Covid-19 pandemic. While uncertainty remains high, the near-term economic impact of Covid-19 is expected to be significant, giving rise to large fiscal and external financing needs.”

The IMF support comes handy at a time when international reserves are depleting fast. The fund will provide financing to the budget for targeted and temporary spending increases aimed at containing the pandemic and mitigating its economic impact on the people. The IMF has clarified that it will remain closely engaged with the Pakistani authorities and as the impact of the Covid-19 shock subsides, it would resume discussions as part of the current Extended Fund Facility Programme.

Confirming the news, Dr Reza Baqir, the Governor of the State Bank of Pakistan, has said that Pakistan will receive a significant boost to its foreign exchange reserves and fiscal space to combat Covid-19 through $1.4 billion Rapid Financing Instrument approval by the IMF as well as the debt relief from official creditors approved by G20. It may be mentioned here that the $1.4 billion RFI is not part of the ongoing IMF programme. The IMF has already cancelled the approval of the second review of the programme that had been scheduled for early April.

Pakistan is also a beneficiary of the G20 states’ decision to freeze payments of developing countries. Latest reports confirm that G20 states – the group of 20 rich economies of the world – has agreed to freeze bilateral government loan repayments for 76 low-income countries until the end of the year. According to preliminary estimates of the Ministry of Finance, Pakistan may get relief on payments of around $1.5 billion official credit extended by 12 members of the group. But Pakistan does not have financial relations with eight other member countries, like Argentina, Brazil, Indonesia, India, Mexico, Turkey and South Africa. The G20 states have approved to defer the repayment of principal and interest on loans for a period of eight months (May-December) 2020. More than half of the relief will come from China on the guaranteed loans.

The $1.5 billion is exclusive of Chinese commercial loans, safe deposits by China and the balance of payment support that China and Saudi Arabia – another G20 member – have extended to Pakistan. The balance of payments support loans and Chinese safe deposits cannot be repaid during the tenure of the ongoing 39-month IMF programme, according to the Pakistan-IMF agreement signed in July 2019.

The group of developed and developing nations also called on private creditors “to participate in the initiative on comparable terms” and asked multilateral development banks, such as the IMF and the World Bank, “to further explore the options for the suspension of debt service payments over the suspension period”. Mohammed al-Jadaan, the finance minister of Saudi Arabia who currently chairs G20, said the debt assistance to 76 countries involved could be worth more than $20 billion. The G20 also resolved to extend the relief period till June next year, if economic conditions keep deteriorating due to Covid-19 spread.

For the next fiscal year 2020-21, starting from July, Pakistan is scheduled to make $2.2 billion to 12 G20 bilateral creditors. These are exclusive of commercial and balance of payments support. Economic Affairs Ministry estimates show that Pakistan will return $840 million to China in the next fiscal year, $408 million to Japan, $200 million to France, $100 million to Germany, $445 million to Saudi Arabia, $130 million to the United States and $50 million to South Korea. Islamabad also owes small amounts to Australia, Italy, Russia and the United Kingdom.

One can mention here the communique issued at the end of a meeting of the International Monetary and Financial Committee (IMFC), which said: “While the global outlook is subject to exceptionally high uncertainty, we expect a recovery next year as we continue to employ all available policy tools to defeat the pandemic, protect jobs, and restore growth.”

Pakistan’s business circles have reacted favourably to the debt relief approved by the IMF and G20 as it is widely believed that the global sovereign debt will reach unsustainable levels after the crisis and some kind of restructuring was needed. The State Bank’s downgrade of economic growth to negative 1.5pc means that it expected the economy to decline by almost 15pc in April and May. This is the prognosis that triggered the 2pc rate cut few weeks back. It is assumed that this will put pressure on the rupee whose value against the dollar may decline further.